Wedgewood Partners Comments on Perrigo
The Company's rich history began in 1887 when Luther and Charlie Perrigo packaged and sold generic home remedies to local general stores. During the 1920's and 1930's, two significant trends developed. First, the Company began offering private label products (including aspirin, Epsom salts and zinc oxide) and consumers began their secular shift away from local general stores to large regional and national drug store chains. The 1950's saw the Company change from a repackager of generic drugs to a manufacturer of higher quality drugs. By the early 1980's the Company became the nation's largest private label manufacturer of health and beauty products and the Perrigo family sold the Company to management. Five of the Company's seven prior president's were descendants of Luther Perrigo. The ownership then flipped a few times and in 1991 the Company was taken public. Since then, the Company has embarked on an acquisition path including dozens of large and small companies in order to scale every aspect of their business model. Indeed, over the past seven years, the Company's inorganic-‐ acquisition related revenue growth has been a mighty 44%, while their 7-‐year organic growth has been just 9%.
Today, Perrigo is the industry "category killer" as the world's largest manufacturer of OTC pharmaceuticals for the store brand market, with a dominant market share of 70%. The Company manufactures over 1,000 products, including over 45 billion tablets per year – that comes out to about 1,400 people somewhere around the globe taking a Perrigo product every second of every day. They also manufacture over 4 billion liquid doses and consume over 50,000 tons of various ingredient powders annually.
The Company's other product lines include generic Rx pharmaceuticals, store brand nutritional products and dietary supplements, plus active pharmaceutical ingredients (API). So, the next time you are in the market to purchase Motrin or NyQuil, as well as Advil, Bayer, Excedrin, Tylenol, Alka-‐Seltzer, Benadryl, Claritin, Robitussin, Sudafed, Rogaine, Monistat, Preparation H, E.p.t., Pepcid, Zantac, Maalox, Mylanta, Prilosec OTC, Pepto-‐Bismol, Metamucil, Ex-‐Lax, FiberCon, Unisom, Nicorette, Enfamil and/or Similac, please consider a Perrigo manufactured store brand alternative.
The Company's Rx business is small at just 12% of revenues, but is growing in excess of 45%. We continue to expect vibrant growth in this sector for the Company as nearly $20 billion in branded RX is slated to switch to OTC. The Company's unmatched manufacturing, packaging and marketing depth, breath, size and scale provides the Company with first-‐mover advantage. Rx such as Lipitor, Singulair, Flomax, Celebrex, plus a bevy of erectile dysfunction, nasal allergy, overactive bladder and migraine pharmaceuticals are ripe for Perrigo switched OTC launches over the next five years.
Perrigo's value proposition for both the retailer and the consumer is quite compelling. In short, the retailer earns more, and the consumer pays less. Sounds too good to be true. It's not. Here's a common example of the compelling economics of store brands oft cited by Company management: Nicorette is a branded nicotine gum. The cost to the retailer sold by GlaxoSmithKline for a single package of Nicorette is about $57. Retailers in turn sell it for $71-‐$72, so there is about a $14 profit or about 20% gross profit margin for a retailer like say, CVS or Wal-‐Mart. Conversely, Perrigo sells their nicotine replacement therapy to the retailer for about $23; the retailer in turn sells it for $53. Now the retailer makes a significant higher absolute dollar profit (about twice the profit as the national brand) and importantly, a much higher percentage of profitability – nearly three-‐fold. But it doesn't end there. Critical to Perrigo's value proposition-‐equation though is also the savings for the consumer. Usually there is about a 25% to 30% savings for the consumer. This consumer savings is key in that offering both the consumer about a 25% to 30% savings and obviously, a much higher margin for the retailer is why retailers continue to give us more shelf space for the Company's products.
The Company relies on three key drivers of growth: the continued expansions of store brands, new OTC launch and still more acquisitions. The Company has indicated that diabetes, adult nutrition and opthalmics are on their short list for further acquisitions. As scale builds, the concomitant increase in operating margins grows as well. Over the past five years, pre-‐tax operating margins have increased from 11% to 19%. Perrigo's success has not gone unnoticed by Wall Street. While we desire to increase our weightings in this terrific company, we need to patiently wait for those rare fatter pitches in the stock.
From Wedgewood Partners’ first quarter 2013 investor letter.